How M&A Can Lead to Better Management

A fundamental question in corporate finance is how mergers and acquisitions create value. Possibilities include generating economies of scale or scope, increasing managerial efficiency, improving production techniques, or strengthening market power. Synergies are a leading motive for doing mergers, but direct empirical evidence on how they are created is lacking. In a new study, we investigate a potential source of synergies—improvements in management practices.

We use a novel survey dataset of plant-level management practices from the U.S. Census Bureau. Specifically, we use the 2010 Management and Organizational Practices Survey, the first large-scale management practices survey of manufacturing plants in the U.S. This survey asks respondents, such as plant or divisional managers, 16 questions about the management practices of their plants. There are six questions about monitoring practices, two questions about production targets, and eight questions about incentives. The questions on monitoring ask about the extent to which performance is tracked and reviewed and whether these data are used to improve performance. For example, one question is, “how many key performance indicators were monitored at this establishment?” The questions on production targets attempt to assess how well production goals are set. For instance, respondents are asked, “what best describes the time frame of production targets at this establishment?” The questions on incentives examine how employees are promoted, rewarded, retained, reprimanded, or dismissed. For example, one question is, “what were non-managers’ performance bonuses usually based on?” In our analyses, we create a plant-level, aggregate, normalized management score that reflects all three of these categories.

We match this survey data to the Census’ Longitudinal Business Database to identify if and when a particular plant is acquired by another firm. Compared with traditional data sources, a major advantage of the Census data is that it allows us to track changes in the management practices and performance of targets and acquirers separately before and after each merger, even after a plant owned by a public firm is acquired by a private firm. Our final sample includes about 14,000 unique plants with data on management practices in 2005 and 2010. Of these 14,000 plants, 14 percent are acquired at some point during our sample period.

Overall, our analyses can be broken down into three parts. First, we examine whether there is a relation between management practices and the likelihood that a firm becomes an acquirer and a plant becomes a target. We find that firms with better management practices are more likely to become acquirers and that plants with worse management practices are more likely to be acquired. Moreover, we are able to show that firms with better management practices tend to acquire plants with relatively worse management practices.

Second, we document economically and statistically significant improvements in the management practices of acquired plants relative to a control group of plants that were not acquired during the same time period. These improvements are not concentrated in one category of management practices, as we find improvements in monitoring, production targets, and incentives separately. Further, we show that management practices not only improve at acquired plants on average, but also the target’s management practices become similar to those at the acquirer’s incumbent plants. We also show that post-merger improvements in the management practices of acquired plants are greater when acquirers have a greater incentive and ability to make these improvements. Specifically, we document larger improvements in the management practices of acquired plants when acquirers have better management practices, managers have greater control over decisions, plants are in more competitive industries, and acquirers and targets have complementary operations.

Third, we examine whether improvements in the management practices of acquired plants translate into better performance. We gauge plant performance using several measures, including total factor productivity, return on capital, and value added per employee. Consistent with the notion that improvements in management practices are a source of gains from mergers and acquisitions, we find that larger improvements in post-merger management practices are associated with larger improvements in performance.

Taken together, the results of our analyses suggest that firms with better management practices tend to acquire plants with relatively worse management practices. Then, following the acquisition, the acquirers improve the management practices of the target plants, and these improvements lead to better performance. Thus, we conclude that our findings imply that spillovers of good management practices constitute an important source of synergies from mergers and acquisitions.

This post comes to us from Professor John (Jianqiu) Bai at Northeastern University, research associate Wang Jin at MIT, and Professor Matthew Serfling at the University of Tennessee. It is based on their recent paper, “Management Practices and Mergers and Acquisitions,” available here.